YUM – KFC’s Rising Prices In China Anger Consumers

08/21/08 10:49AM EDT

The China Daily reported today that KFC raised its prices in China for the second time this year due to increasing commodity costs. The first price increase was implemented in March and menu prices increased between 0.5 yuan and 1.5 yuan. The magnitude of this second price increase is even greater, ranging from 0.5 yuan to 2.5 yuan. For reference, the price of a medium coke is now 6.5 yuan, up from 6 yuan (an 8% increase).

One KFC customer responded to these recent price increases, saying “Its products are quite small in size, and not worth the money if prices continue to go up.” On its 2Q earnings call, YUM management stated in reference to China, “In 2008, as an example, we will meet or exceed our profit targets despite unusually high commodity inflation. We have been able to pass on strategically targeted price increases while maintaining transaction growth.” YUM raised its prices in China by 6% in July 2007 prior to the 2% price increase in March 2008. Before this most recent price increase, prices in China were running up a little over 2%. This price vs. traffic relationship is one that I have talked a lot about and if customers begin to think the price increases are too great, YUM’s traffic growth in China will begin to suffer. These issues could be further magnified by the fact that YUM’s China division is facing more difficult comparisons in the back half of the year with management commenting on its last call, “Also, while we expect China to meet or exceed our full-year profit growth targets, we cannot expect mid-teens same-store sales growth and 30% to 40% profit growth to continue.”